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The following text summarises chapter 1 from the OECD publication Challenges for China's Public Spending: Toward Greatere Effectiveness and Equity.
Total official government spending amounted to 27% of GDP in 2004 but this may be an underestimate and a more realistic estimate may be over 30% of GDP. Official spending consists of two components: On budget spending – the expenditure included in the formal budgets of all government levels – which amounted to 20.3% of GDP and extra-budgetary accounts, mainly at the sub-national level, used to pay for social security and a variety of other purposes. Outlays in these areas were 3.3% and 3.4% of GDP, respectively, in 2004. There is, however, a large amount of off-budget spending by sub-national governments that is not officially recorded or sanctioned but which could be as high as 4% of GDP according to academic estimates. While such outlays cannot be precisely estimated, they would very likely bring China’s actual public spending to above 30% of GDP, a level below that of most OECD countries. Since these estimates were made GDP has been increased as a result of the economic census. All figures in this report show spending relative to pre-revision GDP but if the comparison were made relative to current estimates of GDP, total official spending would amount to 23% of GDP and total spending including off-budget expenditure would likely be above 26% of revised GDP.
In line with practice in most other countries, the government accounts do not include the accrual of contingent liabilities nor tax expenditures. In China's case, contingent liabilities have mainly stemmed from the government effectively acting as the guarantor of lending by banks. If all bad loans not covered by the banks themselves or by asset sales are eventually assumed by the government, there will be a significant increase in government interest payments. Tax expenditures, such as the foregone revenues from exemptions and other tax preferences given to foreign enterprises operating in China, are also significant.
With respect to carrying out spending and collecting revenues, the fiscal system has one of the highest degrees of decentralisation in the world (Figure 2). However the decentralisation of spending is very uneven across regions and this has led to serious problems in overall government spending. Moreover, while the administration of spending and taxation is decentralised to provinces and lower levels of government, local authorities are subject to extensive central direction of their spending and have few discretionary taxation powers.
Government expenditure and revenue: the local share (1)
1. Social security outlays are not included in the local spending but are included in total expenditure figures.
2. Or latest year available: 2000 for Japan, 2002 for Denmark, Korea and Mexico.
3. Chinese data include on-budget and extra-budgetary accounts and central government bond issues on behalf of local governments.
Source: Ministry of Finance of China and OECD, National Accounts Database.
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